Wednesday, December 28, 2011

Music Business/Law Tips - "Breaking A Record Contract" (Part 3)

California Civil Code Section 3423 provides an artist with another tactic to terminate a record deal. Equity will not require a party to perform under a personal service contract, such as a recording agreement. Equity can, however, stop an artist from performing personal services (i.e. recording) for someone else if a valid contract exists which makes the artist's services exclusive to the first party. Such a remedy is in the form of an injunction which would prevent an artist from jumping ship to another label.

Section 3423, nicknamed the "$9,000 Plus Provision", requires that a record company must make increasing minimum annual payments to an artist in order to obtain an injunction. Although somewhat complicated, the law essentially reads that a record company can get an injunction only if it contractually guarantees the artist $9,000 in the first contract year, $12,000 in the second year and $15,000 per year in years three through seven. In addition, in years four through seven, the company must have paid the artist additional sums of between $15,000 and $90,000.

An important case discussing Section 3423 is Foxx v. Williams, involving comedian Redd Foxx and his record company Dootone. A lawsuit for a declaration of rights was filed by Foxx, and Dootone attempted by cross-complaint to enjoin Foxx from performing for another company. The court found that the Dootone contract did not meet the requirements of the injunction statute because it did not guarantee Foxx any compensation, and thus Dootone could not enjoin Foxx. In expounding on the purpose of the statute, the court stated:

"An injunction which forbids an artist to accept new employment may be a harsh and powerful remedy. The monetary limitation in the statute is intended to serve as a counterweight in balancing the equities. The legislature has concluded that an artist who is not entitled to receive a minimum of $6,000 [$9,000 now] per year by performing his contract should not be subjected to this kind of economic coercion."

A similar case which sided with the label is MCA Records, Inc. v. Newton-John. There, singer Olivia Newton-John, unhappy as a recording artist on MCA, tried to terminate the relationship. MCA sought to enjoin her from recording for another record company. The contract between MCA and John did not expressly guarantee her $6,000 [$9,000 now] per year minimum compensation and thus John argued that she could not be enjoined. On the other hand, her contract did provide her yearly six figure nonreturnable monetary advances from which she was to record albums and pocket the difference between the actual recording costs and the advance (i.e., the "recording fund"). Moreover, the contract gave her exclusive control over the allocation of production costs. Under these facts, the court decided that John was, therefore, guaranteed a minimum of $6,000 [$9,000 now], and consequently MCA was entitled to injunctive relief. On the basis of this case, in order to determine whether the minimum annual payments were made under a recording fund scenario, one would have to deduct reasonable recording expenses to see if the remainder is in excess of $6,000 [$9,000 now]. Practically speaking, this method to break a contract is quite common when an artist records for a small independent label that cannot afford to pay an artist an advance.

[part 4 next time]

Ben McLane Esq

Thursday, December 22, 2011

Music Business/Law Tips - "Breaking A Record Contract" (Part 2)

Another common technique to cancel a recording contract is the use of California Civil Code Section 2855, the so called "Seven-Year Statute". According to this statute, "a contract to render personal service...may not be enforced against the employee beyond seven years from the commencement of service under it." Hence, the Seven-Year Statute prevents a record contract from being enforceable against an artist for longer than seven years.

In general, most recording agreements run for a period of one year, followed by at least four one year optional periods (the "term"). Often, the periods are contingent upon delivery of recorded product. In other words, instead of providing that a period of the agreement will be one year, the term provision may read that a period will last, for example, "one year, or a period of eight months after delivery of a specific number of recordings, whichever is later." A term based on delivery would be open-ended, because the period is dependent upon an unknown future date when the recordings are actually delivered. However, because of Section 2855, few artist contracts are written for a period of more than seven years.

Furthermore, under Section 2855, any employee (i.e. artist) who is a party to a contract to render personal service in the production of phonorecords may not invoke the code as a means of departure until the employee first gives "written notice to the employer... specifying that the employee from and after a future date certain specified in the notice will no longer render service under the contract" by reason of the expiration of the seven year time limit.

Nevertheless, it is important to note that Section 2855 does allow for a record company to sue an artist for monetary damages if, after seven years, the artist terminates the contract and signs with a new company but still owes the first company one or more records. Obviously, however, since the music industry is generally unpredictable with respect to sales, such damages would be speculative.

Interestingly Ms Braxton [discussed last time], who signed her first recording agreement in August 1989, initially utilized Section 2855 when - prior to her bankruptcy petition - she filed a suit against LaFace in the Los Angeles Superior Court on the basis that her agreement became invalid in August 1996. Apparently, before the civil action was filed she had held discussions with her label about adjusting the terms of the contract, but the talks had reached an impasse. (Again, it would appear that the filing of the Section 2855 action was a negotiating ploy.) LaFace countersued Braxton for breach of contract and then Braxton filed the bankruptcy action which put a stay on the lawsuits.

In the same fashion as Braxton, other high profile artists have used Section 2855 as a lever in the renegotiation of - or exit from - an existing agreement. In 1992, recording star Luther Vandross filed a suit against Epic Records in Los Angeles Superior Court claiming he was no longer bound to his 1981 contract. The very next year, former Eagle Don Henley became embroiled in a Los Angeles Superior Court action with his label, Geffen Records, wherein Henley sought to terminate his 1984 contract. Thereafter, in 1994, Henley's Eagle brethren Glenn Frey was involved in a similar lawsuit when MCA Records sued Frey after he attempted to end his deal. In that same year, the band Metallica challenged its contact with Elektra Records when it asked the court to dismiss the band from its contract. In 1997 the Smashing Pumpkins notified Virgin Records that it would not render future services to the label under the contract it signed in 1991. These disputes have all been settled out of court, and thus the judiciary has not had a chance to rule on the implications of Section 2855.

Equally important, the Vandross, Henley and Frey cases involved an interesting issue that was not adjudicated because of the settlements, but which might impact the outcome of such a situation if it went to trial. In these three matters, although the original contracts between the artist and label were more than seven years old when the artist attempted to leave the deal, there had been subsequent amendments made to the contracts, and the amendments were not seven years old. Hence, the labels argued that the amendments counted as new contracts. Fortunately, on this point there is some guidance. In a New York case involving singer Melissa Manchester and her record company Arista, the court held that an amendment to a contract can stop the seven year clock (or start it anew) if the amendment is so all- encompassing as to amount to a new contract, and if the artist freely elected to extend the term from an equal bargaining position. The amendment issue notwithstanding, Section 2855 is the device most commonly introduced by a disgruntled artist when seven years has elapsed since the date of contract execution.

[part 3 next time]

Ben McLane Esq

Sunday, December 11, 2011

Music Business/Law Tips - "Breaking A Record Contract" (Part 1)

A musical artist, under certain circumstances, can break
an existing recording agreement.

For a new musical artist, securing a recording agreement with a record or production company is the golden ticket. Often, however, the gilt wears thin due to a panoply of circumstances, and the artist will seek freedom from the agreement. Typically, an unknown artist has limited negotiating power, and a first record deal is usually one-sided in favor of the label. Later, after a hit record, the artist might feel that the agreement is adverse in light of the artist's newfound notoriety. In addition, the artist might believe that another record company would be better suited to further the artist's career, or, more simply, pay the artist a greater amount of money. This situation has caused many an artist to seek (or threaten) some sort of legal recourse against the record company as a means to leave the contract, or else to force a renegotiation of the agreement. Over the years, various tactics have been used by artists as a way of cancelling a record contract.

Recently, a novel and highly publicized approach has been taken by a small group of best selling recording artists in their attempt to leave an exclusive contract situation. They have filed for bankruptcy. The Federal Bankruptcy Code states that existing contracts may be rejected if they impair a debtor's ability to get back on his feet or recover financially. Bankruptcy law has thus armed an artist seeking to break or renegotiate a contract with a powerful weapon.

In January 1998, best-selling vocalist Toni Braxton filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court in Los Angeles. Although her bankruptcy petition ostensibly was filed on the grounds that her liabilities exceeded her assets, music industry pundits believe that the core reason she filed was so the bankruptcy court would void her existing recording agreement with her record label LaFace.

Braxton's 1993 debut album and her 1996 follow-up have sold an estimated 15 million units worldwide. This enormous success begs the question: How can an artist who has sold approximately 15 million albums go bankrupt? According to her label, following the success of the 1996 release, Braxton demanded more money and said that she would no longer record for the label if it did not meet her demands. She made this demand even though she contractually owed the label more albums. The label did not acquiesce and Braxton apparently implemented the bankruptcy action in an attempt to extricate herself from what she viewed as an inequitable contract.

Braxton is not the first successful recording artist to file for bankruptcy while engaged in a contract dispute. In 1993, the members of the act Run-D.M.C. filed for bankruptcy and emerged from the proceeding with a new contract with Profile Records. Likewise, in 1995, the trio TLC filed for Chapter 11 protection in Atlanta and sought to have its contract with its label LaFace abrogated by the court. In 1996, the group settled out of court with LaFace by securing a new contract.

Such a strategic move is risky because there is no guarantee that the bankruptcy court will reject the contract in question. In 1986, actress Tia Carrere, who was seeking to improve her contract with ABC-TV, filed a bankruptcy petition in the U.S. Bankruptcy Court in Los Angeles. The judge dismissed the petition, saying she did not file in good faith, but rather for the primary purpose of rejecting a personal services contract. This ruling was cited by I.R.S. Records in the label's successful bid to have a Chapter 7 petition filed by the members of its then exclusive recording act Concrete Blonde dismissed. However, the gamble paid off for Braxton who signed a new contract with LaFace in November 1998.

The serious issues raised by the Braxton scenario may one day result in new statutory law. In 1999 there was a bankruptcy bill pending before the House Judiciary Committee which would prevent existing recording contracts from being made void within bankruptcy proceedings. The Recording Industry Association of America (RIAA) sought this special interest legislative relief for what its officials have said is a growing problem of artists and artists' representatives either threatening bankruptcy or filing bankruptcy to get out of their contracts. Should this or a similar bill one day pass, it would be the death knell for the use of bankruptcy as a technique for breaking contracts.

[Note: more recently Braxton used the bankruptcy tactic again against her most recent label/to avoid contractual obligations, and although I have not researched it I understand she was successful.]

[part 2 next time]

Ben McLane Esq (with Venice Wong Esq)